Tackling Reality Head-on: Downsizing
Date: Monday , November 17, 2008
Ten years of unprecedented growth in the US economy have created the impression, especially among young people in the high tech industry, that growth is permanent. After all, many have never seen an economic downturn, at least during their professional careers. Now the high-tech industry is going through difficult times. The stock market is down, venture capital funding is tight, private companies are grasping for cash, shutting their doors, watching their CEOs quit.
Unemployment is up, families are being forced to relocate — overall, it is a rather depressing environment compared to a year ago. The bad news forces us to rethink the growth strategies of the past and to focus on survival strategies for the future. What matters is the speed of hard decision-making with focus and objectivity. People need to stay grounded in reality, and not succumb to hype about the future.
The Four Sides of Downsizing
There are four main areas to focus on in downsizing a company. Each is interconnected. And the goal is to maximize returns:
1. Cash Flow Management
In today’s environment, burn-rate has to be decreased, and run-rate has to be increased. Essentially, companies have to return to basics. The money coming in has to be more than the money going out. This is especially true for companies that have been spending cash received from private or public markets without ramping up their revenues. Suddenly, they have to focus on generating cash! The normal practice is to slash expenses, reduce staff, and spend less on capital equipment, office space, travel, and borrowing, while building cushions and focusing on financial management. The key is to not delay the hard financial decisions. In any organization, even under normal circumstances, 15 to 20 percent of expenses can be trimmed without hurting anything. But in this crisis, the focus ought to be to cut 50 percent and see if you can still survive.
Cash flow management also means looking at revenue generating possibilities that have never been seen before. During prosperous times, a company can spend time and money developing new or better products for wider markets. But that way of working only delays revenue generation. Companies may instead have to focus on products for smaller markets that generate immediate cash, including selling new services.
2. Corporate Restructuring
Companies need to restructure to reflect the realities of the changing economy and the market. This means reducing the budget and cutting the size and the ambitions of the company. Sometimes, it is better to condense the target market. Instead of looking at global markets, focus on local markets. Thus, restructuring implies reexamining the product portfolio and marketing plan while preserving the character of the company. This may also mean laying out a good media strategy to change the public perception of the company to reflect the difficult times. But it should not reflect the change in the market being addressed, or the core competencies.
When restructuring, relationships with banks, customers, vendors, and so on, become very important. It is crucial to have clear and effective communications with all concerned, once the tactics are chosen — i.e., lay offs, reductions in product portfolio, delayed payments to vendors, and so on. This reduces the possibility of rumors, which often lead to bad morale among all associated with the company and, in turn, reduced productivity.
3. Redefining Markets
These are the times to examine product revenues and profits. Focusing on higher margin products releases resources and focuses energy and capital. With companies across the board having excess inventory, it may be time to revisit suppliers and shop for better deals on components and services for products.
A similar restructuring may be required in the area of marketing. One possibility is to reduce marketing staff and take on more agents and reps who will work on commission, something that may be hard to find in good times. The idea is to make effective use of excess manpower that the market conditions have made available outside the company. People on the street may be willing to work extra hard to produce results, on your terms and conditions, without being a cash burden on you. Part of realigning markets is looking more carefully at merger and partnership possibilities.
4. Readjusting Manpower
This is the most difficult aspect of downsizing. Today, 30 to 40 percent or more of business costs are related to human resources. Thus, reducing manpower is the major component of cutting costs. Cutting manpower also brings down expenses associated with travel, phones, taxes, insurance, office space, and so on. Unfortunately, it is very difficult to tell people that there is no job for them anymore. It requires excellent people management skills. Helping them find a new job, giving support while they look for a job, providing letters of recommendation, helping during their family crisis — all of this requires special skills and open communications. It is relatively easy to hire. But firing separates the men from the boys in human resource development.
Downsizing human resources must start at the top. You can’t have a top-heavy organization when downsizing. Sometimes, top management that stays may have to take a salary cut. You have to talk the talk, and walk the walk. Only then will the rank and file realize what belt tightening is all about. Sacrifices have to be made at all levels, and the CEO has to set the example.
Everyone has to realize that there is a need to work longer hours, take less salary, do multiple jobs and be more flexible. In these times, you can’t say, “This is not my job.” An engineer may have to do quality control, and a production manager may have to do maintenance jobs. All this has to be achieved while maintaining quality, because that is one factor that cannot change, good times or bad. In fact, quality should improve in bad times to increase competitiveness.
The Bottom Line
Downsizing is normal, even essential, in business. It happens, and should happen, every three to five years. That it hasn’t happened for ten years doesn’t mean that it shouldn’t or wouldn’t have happened. It should be accepted as a routine cycle. That’s the main reason everybody should have a cushion for the future. People must save for bad times, because they are going to come! Unfortunately, due to the extended period of growth, people have forgotten what saving is all about. We grew up with the idea of saving, even in the good times, because we knew that bad times would come. In fact, earlier there were often more bad times than good times. Now it is the other way around. People and companies have spent indiscriminately and the present situation teaches a good lesson. People have bought homes, for example, and are now having problems making mortgage payments because they never thought that this would happen to them.
The situation is going to rapidly get worse, because now the reality is settling in. Increasing unemployment is drastically reducing spending. Corporate revenues some high-tech companies are slowing to 50 percent of their peak levels, an unthinkably high number. This means the workforce will have to be reduced by 50 percent. The repercussions of this entire chain of events are huge.
In all of this, downsizing is painful, but crucial. It’s like surgery — it hurts and it requires courage. But those who endure the surgery have a better chance of survival. Any measures that reduce expenses or increase cash flow are fair game. Decisions need to be made strictly on cash flow — not on ambition, emotion, or even regular business logic. It’s all about how much cash you have and how much you need to survive. It’s about keeping the doors open no matter how tough it gets out there.
Sam Pitroda is chairman and CEO of WorldTel. He has been a founder of several companies in Europe and North America and the first chairman of India’s Telecom Commission. To exchange ideas with Pitroda, write to firstname.lastname@example.org. This article is based on a telephone conversation with Mr. Pitroda.